Information Markets and the Comovement of Asset Prices

Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This model generates this high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate `excess covariance.' The cross-sectional and time-series properties of asset price covariance are consistent with this explanation

Media Frenzies in Markets for Financial Information

Emerging equity markets witness occasional surges in the price level (frenzies) and increases in cross-market price dispersion (herds), accompanied by a flood of media coverage. Complementarity in information acquisition can explain these anomalies. Because information has a high fixed cost of production, its equilibrium price is low when quantity is high. Investors all buy the same information because it has the lowest price. By lowering risk, information raises the asset's price. Given two identical assets, investors herd: one price is higher because abundant information about that asset reduces its payoff risk. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria create price paths resembling periodic frenzies. Using equity data and a new panel data set of news counts for 23 emerging markets, the results show that when asset market volatility increases, news coverage intensifies, and that more news is correlated with higher asset prices and higher cross-market price dispersion

Media Frenzies in Markets for Financial Information

Emerging equity markets witness occasional surges in prices (frenzies) and crossmarket price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/highasset- price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion. (JEL D82, G12, G14)